In
December, 1995, I was asked to write an article on the future of banking for a
small Spanish magazine - Mundo Español - published in London. Today, reading
about the "demise" of banks because of the "fintech
revolution", I had a feeling of déjà vu and
thought I would share the article I wrote all those years ago. Hope you enjoy!
To adapt
or die...or to die trying
The spate
of mergers and acquisitions that have taken place within the banking sector
since the beginning of the year, may have made bankers reminisce, some
maybe with nostalgia, about the late 1980's and the fireworks over the
Thames to celebrate the liberalisation of the London Stock Exchange -the Big
Bang.
Then, banks
and stockbrokers jostled with each other as they tried to secure a prominent
position in the market by merging with or acquiring the dealer and broker firms
operating in it, or by enticing away whole teams of brokers with the offer of
astronomical salaries -something very welcomed by the owners of the watering
holes in the City, as these individuals promptly invested sizeable chunks of
their windfall in these establishments. The frantic activity that ensued in
London, as in other financial centres, was boosted by the merger mania in the
corporate sector, and continued until Black Monday in October 1987.
This time
round, some of the reasons given for the mergers and acquisitions may be
the same and will probably mention synergy, economies of scale or
competitiveness, but now they are taking place in the wake of a recession, and
the atmosphere is one of gloom rather than self-congratulation.
In the U.S
alone, 277 mergers and acquisitions have taken place since the beginning of the
year. In August, the merger between Chemical and Chase created the country's
biggest bank with assets of $297 billion. In March, Mitsubishi Bank and Bank of
Tokyo sealed a merger creating the world's biggest bank with assets of $700
billion. In the U.K, Swiss Bank Corporation bought the investment banking
business of S.G.Warburg, Dresdner Bank bought Kleinwort Benson, and recently
Lloyds and TSB have agreed to merge, to mention but a few examples.
What are
the reasons for all these mergers and acquisitions? There are many, but the
main one is "financial disintermediation". Traditionally, banks have
had a virtual monopoly as intermediaries in the financial system; they accept
deposits (appearing as liabilities in their balance sheets) and make loans
(which appear as assets), with the peculiarity that most of those deposits are
liquid since they have to be repaid on demand, and most of the loans are
illiquid since they are granted with maturities in the future.
This
"intermediation" is sustainable as long as savers continue to channel
their money to the banks, and borrowers do not default. What has been happening
in recent years is that banks, on the one hand have been confronted by the
proliferation of non-bank financial intermediaries in the form of investment
funds, insurance companies, and even the financial arm of department stores,
competing to attract the money from savers and investors, and on the other have
suffered losses as a result of loan defaults and/or bad management. Even their
traditional business of lending to corporates has been hit by this process of
disintermediation, as companies have increasingly resorted to the capital
markets to raise funds.
In view of
all this, analysts and academics have for some time been speculating on
whether we are witnessing the slow agonising death of most banks, to be
replaced by a myriad of financial intermediaries specialising in specific
areas, and those banks which are deemed necessary for the smooth functioning of
a modern financial sector.
Whether
this scenario is probable depends, to a large extent, on how we define what a
bank is. The process of disintermediation and the competition from non-bank
financial intermediaries have forced many banks to adapt to the changing circumstances,
and they have done so in many different ways. In some cases the
transformation of a bank has been of such a magnitude that is has led to the
question: is it a bank or a financial services company offering bank
services? Today, many so-called banks derive a higher proportion of their
income from securities and foreign exchange trading, and fees, than they do
from the interest spread on their lending.
The picture
that emerges is a fuzzy one, if anything because in some countries a banking
group will own a retail banking operation concentrating on
"traditional" lending to individuals and small/medium companies
through a branch network, maybe another bank catering for large corporates and
engaged in investment banking activities, a securities trading operation, an
insurance company, etc.
In
continental Europe, for example, there is a tradition of universal banks
offering the whole spectrum of financial services, and with large shareholdings
in industrial companies that result in an intimate, and sometimes exclusive,
lending relationship. For a long time, these banks operated in oligopolistic
markets shielded from foreign competition by regulation and the high costs of
entry, but with the gradual removal of restrictions for foreign banks and the
onset of the Single European Market, some of them began to break ranks in order
to adapt and compete in a new environment. In Spain, Banco Santander took the
initiative by the introduction of the supercuentas in 1989,
and since then banks have fought fierce battles to keep or to poach each others
customers as new or revamped products have been introduced into the market
(investment funds, mortgage loans, personal pensions, etc.). During this period
there have also been a number of mergers and acquisitions, the two largest
of which created Banco Bilbao Vizcaya and Banco Central Hispano; the
consolidation of the public sector banks into Argentaria; and the majority
purchase of Banesto by Banco Santander after the collapse of the former in
December 1993.
What does
appear to be clear from the process underway in the banking sector is that
banks have to adapt or die. Some, like the American investment banks have for a
long time followed a strategy of providing specialised and innovative services
at a global level (admittedly, forced to some extent by the provisions of the
Glass-Steagall Act); others have opted to stay in their home markets trying to
become a dominant force by increasing volume through mergers and acquisitions;
some have sought new markets in the emerging economies; and yet others have
concentrated, more than most, in providing risk-management products and in
securities and foreign exchange trading.
Some will
succeed and others will, for various reasons, die trying like Banesto and
Barings -but as Kipling would say, that is another story.
